AMR Corp. (AMR) bonds signal its American
Airlines unit will retire older jets in bankruptcy, punishing
investors in debt backed by the planes while those secured by
newer aircraft indicate lenders will be paid in full.

American’s notes maturing in May 2021 and backed by 32 out-
of-production jets traded at 51.5 cents on the dollar yesterday,
while bonds due in July 2019 and secured by newer Boeing Co.
aircraft traded at 103.5 cents. The McDonnell Douglas-83 jets
tied to the 2021 notes were delivered beginning in 1997 and have
“no value,” said CreditSights Inc. analyst Roger King.

The carrier became the last large U.S. full-fare airline to
seek protection from creditors on Nov. 29, listing $24.7 billion
in assets and $29.6 billion of debt in Chapter 11 papers filed
in U.S. Bankruptcy Court in Manhattan. Fort Worth, Texas-based
AMR is seeking to pare expenses, likely leading to job and
flight reductions, Chairman and Chief Executive Officer Tom Horton said in a conference call with reporters.

Bonds secured by MD-80 series planes are “likely
candidates for rejection or, if they’re kept at all, they’re
going to be renegotiated,” said Bill Warlick, a Chicago-based
analyst at Fitch Ratings. While “there will be a desire to
affirm a lot of the aircraft-related debt because they want to
keep flying the aircraft” notes backed by older planes are
“most at risk,” he said.

Fleet Reductions

American may cut 10 to 15 Boeing 757s and 767s from its
fleet, with the carrier’s MD-80s also “clearly at risk,” Mark Streeter, a debt analyst at JPMorgan Chase & Co., wrote in a
note to clients yesterday.

Unloading older jets should help AMR shrink its fuel bill,
which rose 33 percent to $6.3 billion in 2011’s first nine
months from a year earlier. American began taking deliveries in
2009 on an order of 137 Boeing 737-800s that are about one-third
more fuel efficient than the MD-80s being replaced.

Yields on AMR’s debt soared to distressed levels and the
company’s stock tumbled in recent weeks amid speculation that a
Chapter 11 filing was inevitable as losses drained cash
reserves. AMR had $4.1 billion in unrestricted cash and short-
term investments as of Nov. 25, Chief Financial Officer Bella Goren said in an affidavit.

Negotiations between the airline and its pilots union
stalled on Nov. 14 after the Allied Pilots Association board
decided not to send American’s latest offer to members for a
vote. AMR had been seeking to close what it said was an $800
million annual gap in total labor costs with larger rivals
United Continental Holdings Inc. and Delta Air Lines Inc.

Biggest Airlines

American’s cost structure, compared with other airlines,
had become “untenable,” said Harvey Miller, the company’s
bankruptcy lawyer, at a court hearing Nov. 29 in Manhattan.

The carrier lost its position as the biggest airline by
traffic after Delta bought Northwest Airlines Corp. in 2008,
then slid to No. 3 last year when UAL Corp.’s United Airlines
and Continental Airlines Inc. merged.

Delta, Northwest and UAL were all under bankruptcy
protection late in 2005. US Airways left Chapter 11 in September
of that year through a merger with America West Holdings Corp.

Investors in AMR’s $840 million of unsecured debt may
recoup “next to nothing” in the reorganization, Fitch’s
Warlick said. The company’s $75.5 million of 9 percent senior
unsecured notes due in August 2012 traded at 16.25 cents on Nov.
29, Trace data show.

‘Worthless’

American’s $177.7 million of 6.977 percent notes backed by
the 32 MD-83s were issued at par in May 2001, according to data
compiled by Bloomberg. The company’s $450 million of 10.5
percent notes maturing in October 2012 and secured by 141
aircraft, including 73 jets in the MD-80 family delivered from
1985 to 1992, tumbled to 87.8 cents today from as high as 101.8
cents on Sept. 29, Trace data show.

“Basically half of the portfolio by plane count is
worthless,” CreditSights’s New York-based King said of the
collateral backing the 10.5 percent bonds. “The question is, is
there enough value in the other planes to keep your par?”

The $488.2 million of 10.375 senior secured notes due in
2019 are backed by collateral including 16 Boeing 737s delivered
in 2009 and 2010, Securities and Exchange Commission filings
show.

American Airlines Inc.’s $1 billion of 7.5 percent bonds
maturing in March 2016 and backed by airport slots, gates and
routes are trading as much as 20 cents lower than other first-
lien debt because the structure has never been tested in court,
analysts said. It’s unclear how the assets backing the bonds
could be transferred to creditors.

The collateral includes 392 airport slots at Heathrow,
Tokyo Narita and Haneda, Shanghai Pudong, Beijing and New York’s
John F. Kennedy and was valued at $2.3 billion by Morten Beyer &
Agnew in February, Streeter wrote in the report.

The debt was quoted at a mid-price of 77.6 cents
yesterday, according to Bloomberg Valuation, while American’s
$725.7 million of 8.625 percent notes backed by jets and issued
in September traded at 97.1 cents, Trace data show.

“We still think AMR’s equity is worthless and likely the
unsecured debt as well,” Vicki Bryan, an analyst at Gimme
Credit LLC, wrote yesterday in a note to clients. “There also
is an increasing risk that at least some of AMR’s secured debt
may be impaired,” particularly the bonds backed by gates,
routes and slots, she wrote.